These days, it’s not uncommon for people to be worried about what you can do if you don’t pay your student loans. But if you’re in a position where you might not be able to make your student loan payments, your first step should be to get informed about your rights and learn what actions can help you navigate through this challenging situation.
It’s always important to call your lender and attempt to work out an agreement with them, rather than simply ignore the problem or hope it will go away.
Below, we’ll explain each step of the process to prepare for what happens if you don’t pay your student loans. When you think you are going to have problems making the monthly payments, you need to take action immediately and use these answers to determine your best course of action:
Should I use deferment if I can’t pay my student loans?
You should definitely consider it. But first, let’s make sure we understand what it means. Deferment on student loans means that you are not required to make your usual monthly payments (and if the loans are subsidized, then they won’t accrue interest either). To qualify for deferment on federal loans, the Department of Education states that one of these conditions must be true:
- You are enrolled in school or a graduate fellowship
- You are participating in a disability rehabilitation program
- You are unemployed or facing economic hardship
- You are on active duty in the U.S. military
What about deferment for private student loans? In many cases, private lenders have similar rules regarding deferment eligibility. If you are afraid of missing payments on a private loan, your first step should be to inquire about deferment. However, if you don’t qualify, this next question is one you should ask…
Should I use forbearance if I can’t pay my student loans?
Forbearance can be a great option for people who can’t pay their loans and are not eligible for deferment. You might wonder, “how is forbearance different from deferment?”
The answer is that while deferment allows you to postpone payments and avoid accruing interest, forbearance means a temporary renegotiation of your repayment plan with your lender. You may be able to reduce the amount of your monthly payments, spread your payments over more years, or even refrain from paying for a period of time. But meanwhile interest charges will continue and will be added to your principal balance.
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However, despite the fact that forbearance will not save you from continued interest charges, it can still be a lifesaver if you can’t meet your minimum payments.
What programs are available to help lower my student loan payments?
There are some great programs for people who cannot afford their monthly payments. Most important is the Income-Based Repayment program, which limits your monthly payment to 15% of your disposable income and extends your repayment term to 25 years. While this can cost you more interest charges in the long run, it can be very helpful for people whose monthly payments under the standard repayment plan are simply too high.
What if I miss a student loan payment?
Sometimes you simply can’t pay and have not been granted a period of deferment or forbearance. When you miss a payment on your student loan, it’s similar to what happens when you can’t pay your credit card, but it depends on exactly how late your payment is.
If you are less than 30 days late on your payment, there might not be any immediate consequence. You may be contacted by your lender or servicer, but they will not usually report you to one of the 3 major credit bureaus at that point, so your credit report and credit score will still be safe.
If you become more than 60 days late on your payment, the lender will probably be contacting you to find out why you haven’t paid and they will try to convince you to pay at least part of the amount you owe. At this point, your tardiness may be reported to the credit bureaus, in which case your credit score would suffer.
How much will my late student loan payment hurt my credit score?
If you become more than 90 days late, you will usually be considered delinquent on your student loan payment, and at that point you will almost certainly be reported to the credit bureaus. This can have a very negative impact on your credit score, especially if your score was relatively high to begin with. For example, if your score is currently above 750, it may drop by as much as 100 points as a result of a being delinquent on your student loan.
Even if your score was not good to begin with, a delinquent account can still take many points off your score – a scenario you always want to avoid if possible.
What if I default on my student loans?
After around 270 days of not paying your student loans, you would be considered to be in default. Once that happens, your loans will likely be turned over to a collections agency whose job will be to recoup as much of the loan balance as possible from you.
What are the consequences of defaulting on student loans?
The consequences can be very serious. For starters, your entire loan balance becomes due immediately – no more repayment plan. Also, you lose any eligibility for deferment or forbearance. And perhaps worst of all, your loan balance may increase due to the addition of court fees and/or other legal fees associated with the collections process.
Can the government garnish your wages if you default on your student loan?
Yes. If the loans are federal loans, the Department of Education must give you 30 days notice before it begins garnishing your wages, which means up to 15% of your paycheck will be withheld each pay period and used to pay off your loan balance. If your loans are private student loans, your lender will have to get a court order before they can garnish your wages. (You can see the Department of Education website for more information about wage garnishment and other consequences of default)
How do you get student loans out of default?
There are three ways to get your loans out of default:
1. Loan Repayment (more info) – This refers to paying the loan in full. Most people would not be able to pay the loan in full, however, which means the following option would be more realistic…
2. Loan Rehabilitation (more info) – Requires negotiating a new payment plan with the lender; once you have made a certain number of payments as agreed, your loan can be taken out of default.
3. Loan Consolidation (more info) – You can get loans out of default by consolidating them into one consolidation loan, with a fixed interest rate. Any late fees, legal fees, and accrued interest will be added to the principal of the new consolidation loan.
You should research each of these options if you find yourself with defaulted student loans. Each has its advantages and disadvantages, so consider carefully before making a decision.
Hopefully with the tips in this article you’ll never find yourself in default, though! Also, make use of these three great tools: this great site created by the CFPB to help you evaluate the options available to you, our awesome Student Loan Debt Resource Center, and of course, ReadyForZero, which will help you make a plan to pay off all your debts (including student loans, credit cards, etc.) in the fastest way possible.
As always, let us know in the comments if you have any questions and we’ll do our best to answer them!
Image credit: zimmytws